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WaMu Class

WaMu Class

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In re Washington Mut. Mortgage-Backed Securities Litigation, 276 F.R.D. 658 (2011)
© 2012 Thomson Reuters. No claim to original U.S. Government Works.1
276 F.R.D. 658United States District Court, W.D. Washington,at Seattle.In re WASHINGTON MUTUAL MORTGAGE–BACKED SECURITIES LITIGATION.This Document Relates to ALL CASES.No. C09–37 MJP. | Oct. 21, 2011.
Investors brought putative class action under the Securities Act against entities that created and sold mortgage-backed securities (MBS), alleging that residential mortgage loans backing the MBS were fundamentally impaired and thatinvestors were mislead as to the quality of the underwriting of the loans. Defendants moved for judgment on the pleadings.Plaintiffs moved for class certification.
The District Court,Marsha J. Pechman, J., held that:[1]investors lacked standing to bring putative class action on behalf of purchasers of certain MBS tranches that investors didnot purchase;[2]proposed class of 701 investors was sufficiently numerous that joinder would be impractical;[3]existence of common legal question satisfied commonality class-certification requirement;[4]named plaintiffs' claims were typical of those of putative class;[5]named plaintiffs would adequately represent class;[6]common questions of law and fact predominated over any individual issues; and[7]class action was superior method of adjudicating claims.Defendants motion granted, plaintiff's motion granted in part.
Attorneys and Law Firms*661
 Christopher E. Lometti,Daniel B. Rehns,Joel P. Laitman,Kenneth M. Rehns,Richard A. Speirs, Cohen, Milstein, Sellers & Toll, PLLC, New York, NY,Joshua S. Devore,Matthew B. Kaplan,S. Douglas Bunch,Steven J. Toll,Julie Goldsmith Reiser, Cohen, Milstein, Sellers & Toll, LLC, Washington, DC,Janissa Ann Strabuk ,Kim D. Stephens, Tousley Brain Stephens, Seattle, WA,Anne L. Box, Scott + Scott, LLP, San Diego, CA,Geoffrey M. Johnson, Scott + Scott, LLP, Cleveland Heights, OH, for Plaintiffs.Wamu Officer Defendants Securities, MDL, pro se.Michael H. Barr, SNR Denton US LLP, New York, NY,Bruce Earl Larson,Dennis H. Walters,Mike Liles, Jr.,Walter Eugene Barton, Karr Tuttle Campbell,Brian C. Free,Louis David Peterson, Hillis, Clark, Martin & Peterson,Larry Steven Gangnes, Lane Powell, PC,Gavin Williams Skok , Riddell Williams,John D. Lowery,Paul Joseph Kundtz, Riddell & Williams, Seattle, WA,David M. Balabanian,Frank Busch,John D. Pernick , Bingham McCutchen, San Francisco, CA,James J. Coster,Joshua M. Rubins, Satterlee, Stephens, Burke & Burke,Adam Zurofsky,Floyd Abrams,Tammy Roy, Cahill, Gordon & Reindel, New York, NY, for Defendants.
In re Washington Mut. Mortgage-Backed Securities Litigation, 276 F.R.D. 658 (2011)
© 2012 Thomson Reuters. No claim to original U.S. Government Works.2
MARSHA J. PECHMAN, District Judge.This matter comes before the Court on Defendants' motion for judgment on the pleadings and Plaintiffs' motion for classcertification. (Dkt. Nos. 259, 223, respectively.) Having reviewed the motions, the oppositions (Dkt. Nos. 327, 252), thereplies (Dkt. Nos. 337, 322), and all related papers, and having heard oral argument on October 13, 2011, the Court GRANTSDefendants' motion and GRANTS in part Plaintiffs' motion.
Plaintiffs Doral Bank Puerto Rico (“Doral”), Policemen's Annuity and Benefit Fund of Chicago (“Chicago PABF”), andBoilermakers National Annuity Trust (“Boilermakers”) pursue claims under § 11 of the Securities Act of 1933 arising out of their purchase of mortgage-backed securities (“MBS”) created and sold by Defendants that collapsed in value relatively soonafter issuance. Plaintiffs allege that the residential mortgage loans backing the securities were “fundamentally impaired” andthat they were mislead as to the quality of the underwriting of the loans. They seek to certify a class of all “persons or entitieswho purchased or otherwise acquired WaMu [Washington Mutual] Mortgage–Pass Through Certificates, Series: 2006 AR–7, 2006 AR–12, 2006 AR–16, 2006 AR–17, 2006 AR–18 or 2007–HY1, on or before August 1, 2008....” (Dkt. No. 223 at7.) The Class thus includes all persons or entities who purchased WaMu MBS sold in six separate offerings, each of whichcontained roughly twenty different MBS “tranches,” or slices. Across the six offerings, Defendants sold certificates in one-hundred-twenty-three separate tranches. Plaintiffs collectively purchased certificates in only thirteen of these tranches.The mortgage-backed securities at issue in this litigation have their genesis with Washington Mutual Bank (“WMB”). WMBoriginated or acquired mortgage loans, and then sold them to Washington Mutual Asset Acceptance Corporation (“WAAC”).(Second Amended Compl. (“Compl.”) ¶ 10.) WAAC then “deposited” or transferred the loans into six separate trusts, whereeach trust represents a complete “offering.” (James Report ¶ 15.) The trusts were divided into different loan groups, whereineach loan group shares certain characteristics as to the loans themselves. (
See e.g.,
2006 AR–12 Pro. Supp. at S–5.) WAACsold the certificates to WCC, which underwrote the offerings and sold the certificates in six offerings at issue here. (JamesRep. ¶¶ 36–37.)Of the six offerings at issue in this litigation, two were comprised of pay option adjustable-rate mortgages (“ARMs”) with afixed rate period between one to thirteen months, while the four others contained hybrid ARMs where the interest rates werereset at anywhere between five and ten years. (James Rep. ¶ 33.) Within each offering, WAAC created numerous certificatesthat represent fractional interest in the income streams generated by the loans deposited in the trust. (Compl. ¶ 10; Hakala Report ¶ 12.) The certificates were then grouped into tranches that “represented specific rights and claims to the receipt of principal andinterest payments from the pools of mortgages that they were collateralized by and associated with.” (Hakala Rep. ¶ 12.) Eachtranche is an individual security in which investors could buy certificates. Each tranche has distinct characteristics, including:(1) its own Committee on Uniform Security Identification Procedures (“CUSIP”) number, (2) original principal note balance,(3) interest rate, (4) payment rights, (5) credit rating, and (6) payment priority. (You Decl. Exs. C, E, F; James Rep. ¶¶ 32,42–46; Hakala Rep. ¶¶ 12–13.) Each tranche has a “specified level of seniority (or subordination) of the holder's claims to thecollateral in the event of defaults and losses of principal in the pool of mortgages it was associate with.” (Hakala Rep. ¶ 12.) Theparties agree the each tranche is a separate security, although Plaintiffs contend that they are sufficiently similar and interrelatedto be treated as one security for purposes of standing. One of Plaintiffs' experts, Scott Hakala, admitted that each tranche isan individualsecurity
with diff erent rights and claims to receipt of principal and interest payments from the pool of mortgages. (Hakala Report ¶ 12; Hakala Dep. ¶ 159.) As discussed below, the Court finds each tranche to be a separate security.
In re Washington Mut. Mortgage-Backed Securities Litigation, 276 F.R.D. 658 (2011)
© 2012 Thomson Reuters. No claim to original U.S. Government Works.3
Defendants seek dismissal of any and all claims related to the one-hundred-ten tranches that Plaintiffs did not buy on the theorythat Plaintiffs lack standing to pursue claims related to them. Plaintiffs separately move for class certification of a class thatwould include all tranches within the six offerings. Because standing is a question of subject matter jurisdiction, the Courtaddresses this issue first.
 LaDuke v. Nelson,
762 F.2d 1318, 1325 (9th Cir.1985)(noting that standing “is a jurisdictional elementthat must be satisfied prior to class certification”).
Defendants' motion turns on one question: do Plaintiffs have standing to pursue claims tied to the MBS tranches that theydid not purchase, but that were sold in the same offering in which Plaintiffs bought related MBS tranches? The Court findsPlaintiffs lack standing to pursue claims tied to the MBS tranches they did not purchase and that they cannot represent a classof those purchasers.
Section 11 of the Securities Act of 1933 creates a cause of action for “any person acquiring such security” pursuant to a“registration statement [that] contained an untrue statement of a material fact or omitted to state a material fact....”15 U.S.C. §77k(a). This Court and others have construed this section of the Act to require the plaintiff to have actually purchased the securityupon which it seeks to sue.
See In re Wash. Mut. Inc., Sec. Deriv. & ERISA Litig.,
694 F.Supp.2d 1192, 1221 (W.D.Wash.2009);
 Maine State Retirement Sys. v. Countrywide Fin. Corp.,
No. 2:10–CV–0302 MRP (MANx), Dkt. No. 257 at 9, 2011 WL4389689 (C.D.Cal. May 5, 2011)(collecting cases). This Court has concluded that the named plaintiffs in a securities actioncould not pursue Section 11 claims as to debt securities that no named plaintiff purchased, even though they were sold in anoffering in which one named plaintiff had purchased the other security on offer.
 In re Wash. Mut.,
694 F.Supp.2d at 1221.Plaintiffs have standing only to sue on the thirteen tranches of WaMu MBS that they purchased. Each tranche of MBS is anindividual security. This is evident in the fact that each has its own CUSIP, credit rating, risk profile, payment rights, paymentpriority, principal balance, and interest rate. Each offered different risks and possible returns on investment. That each tranchesold in an offering is related to the other does not alter the fact that each tranche is a separate security for purposes of §11 standing.
See Countrywide,
Dkt. No. 247 at 12 (rejecting this same argument). Plaintiffs argue that because the tranchesare created from the same pool of mortgages, they are all interrelated sufficiently that every tranche within an offering iseffectively one security. This argument invites the Court to overlook the fact that each tranche has a separate rating, separatepayment structure, and risk profile, and create a special rule for MBS. The Court rejects the invitation. The very point of poolingmortgages and creating tranches is to create different securities whose credit and risk profiles attract different purchasers.Plaintiffs' standing is thus limited only to those tranches in which they actually purchased certificates.Plaintiffs attempt to distinguish this Court's ruling in the WaMu Securities Litigation is without merit. Plaintiffs argue that theCourt's decision as to standing is distinguishable because the Court was considering two debt securities, not mortgage-backedsecurities. The Court's decision did not turn on the type of security. It was simply the fact that they were distinct securities that theCourt found a lack of standing, despite the fact they were sold in the same offering.
 In re Wash. Mut.,
694 F.Supp.2d at 1220–21.The Court is equally unpersuaded by the cases cited and relied upon by Plaintiffs. In two of the three district court opinionsPlaintiffs cite, the courts did not specifically address tranche-level standing in deciding motions
for class certification.
See New Jersey Carpenters Health Fund v. Residential Capital, LLC,
272 F.R.D. 160 (S.D.N.Y.2011);
 New Jersey Carpenters Health Fund v. DLJ Mortgage Cap., Inc.,
No 08 civ. 5653(PAC), Dkt. No. 125, 2011 WL 3874821 (S.D.N.Y. Aug. 16, 2011).Rather, they both dealt with standing at the offering level. These cases are of no assistance. In
Pub. Employees' Ret. Sys. of Miss.v. Merrill Lynch & Co. Inc.,
277 F.R.D. 97 (S.D.N.Y.2011), the court dealt cursorily with tranche-level standing in its decisionon class certification and concluded the “the representations in each Offering apply equally to all tranches within that offering.”
at 108.The Court nowhere addresses the question of whether each tranche is a separate security and provides no meaningful

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